SEC Sues Two Former Morgan Stanley Advisors
U.S. securities regulators sued two former financial advisers at Morgan Stanley Friday for defrauding at least 50 mutual fund companies and their shareholders.
Darryl Goldstein, 36, and Christopher O'Donnell, 45, engaged in deceptive acts between January 2002 and August 2003 that were designed to circumvent mutual funds' restrictions on market timing and generate fees for themselves, the U.S. Securities and Exchange Commission alleged in a complaint filed in U.S. District Court in Manhattan.
Market timing is the practice of short-term trading in mutual fund shares to exploit the inefficiencies of mutual fund pricing. Mutual funds often impose restrictions on excessive trading and monitor activity in their funds as the practice, although not necessarily illegal, can harm shareholders.
Typically, if a mutual fund determines a shareholder or broker has violated its trading restrictions, it will limit or refuse to enter into any future trades with that party, according to the complaint.
For only two hedge fund customers in less than two years, they engaged in more than 4,000 market-timing trades with total trading volume exceeding $4.8 billion and opened about 122 brokerage accounts, the SEC alleged in the complaint.
"The defendants intended to, and did, make it more difficult for the mutual funds to detect and prevent their customers' market-timing trading," the SEC alleged.
The two generated almost $1 million in fees for themselves and "in the process harmed countless unsuspecting mutual fund shareholders," the SEC alleged.
Goldstein worked at Morgan Stanley from October 2000 to November 2003, while O'Donnell was there from August 1998 to March 2004.
Goldstein is now a registered representative at Gilford Securities. He was not at his New York office on Friday, according to a company receptionist.
O'Donnell, now a registered representative for Bear Stearns, was not available for comment.
A Morgan Stanley representative did not have an immediate comment.